Bank branches are costly, but can pay dividends

As happens in the newspaper industry, we left a few items on the cutting room floor in my story in today’s paper on the need for bank branches in the Internet age.

To be sure, banks do need a bricks-and-mortar presence of some sort, experts said. Rather, the question is how much of a presence is needed when more customers, especially young ones, are going online for their financial needs.

“I see a diminishing need for branches, particularly in the Internet age,” said Jacob Thompson, a managing director in the Dallas office of Samco Capital Markets. “If you’re retail- oriented, it makes sense for right now.”

But both the giant “money center” banks and their smaller community bank brethren will face a shrinking need for branches as time goes on, Thompson added.

It’s important for a bank to find the right mix of online services and retail locations, as the latter cost money to set up and operate.

“You’ve got to have the branches. If you don’t, you don’t have people to do the sales and marketing,” said Janet Miller, president of The Lancaster Group Inc., a North Carolina consultancy that helps financial institutions nationwide determine the best locations and numbers of branches for their institutions.

But “You don’t want to over-branch,” she added. “Branches are very expensive.”

A typical medium-size branch is around 3,500 square feet, with two decent-sized offices and two customer- service representatives, Miller said. That location will usually cost $1 million, the money going into things such as real estate, the building, a safe and data processing, she said. In addition, the median land cost nationwide for a good retail branch is around $750,000, although that number will vary in places like Dallas, where it could be more.

At the community- bank level, branches need between roughly $30 million and $50 million in deposits in order to make money, Thompson estimates. Small branches with, say, $10 million to $15 million in deposits “are probably money losers,” he said.